- Australia’s latest inflation report will be released later today.
- Should it come in below expectations, and see the Aussie dollar fall, Deutsche Bank says traders should buy the dip.
- It says a weak inflationary story is already largely priced in with recent newsflow from abroad supportive of Aussie dollar strength.
Australia’s latest inflation report will be released today.
If, as in six previous quarters, headline inflation undershoots expectations, it could well see the Australian dollar come under renewed selling pressure, reflecting diminished odds of a rate hike from the RBA in the foreseeable future.
It could even see markets begin to price in a potential cut, depending on how bad the miss is.
Should this hypothetical scenario play out — and we want to make the point that it’s just possibility — Deutsche Bank has some advice for anyone trading the Australian dollar around the release.
Buy the dip.
“We’d look to buy any resulting dip in the AUD,” says Tim Baker, Macro Strategist at Deutsche Bank.
“That’s because the softer domestic story is now well known. Further, the relationship of the past 1.5 years suggest AUD is low even relative to that market pricing, and there doesn’t look to be much scope for the pricing of cuts given how insistent the RBA has been that the next move will be a hike.”
A weak inflationary story is already largely priced in, essentially, reflected in an increase in short speculative positioning in the Aussie dollar based off recent data from the US CFTC, along with market views that don’t have a full 25 basis point rate hike priced in from the RBA until early 2020.
Given that backdrop, and the clear reluctance from the RBA to cut official interest rates any further, it suggests it would require a large undershoot for inflation to get the Aussie really under pressure.
And, given much of its recent movements have been influenced by offshore factors, Baker says recent developments could work in the Aussie’s favour.
“The key to AUD upside will be the global newsflow. On this front, we’re inclined to take a more positive view,” he says.
“President Trump may now be pivoting towards concern over USD strength, after previous focus on trade hurt emerging market assets and helped USD by extension.
“We also note the commodity-intensive parts of China’s growth looks solid — housing starts are up 20% over the past year, and construction equipment sales are strong, which suggests iron ore prices should be supported.
“Further, Chinese policymakers now look likely to ease fiscal policy after already loosening monetary policy a little.”
The latter definitely helped the Aussie to bounce on Tuesday, and, in the absence of further negative headlines in relation to trade, is likely to continue to do so in the near-term.
Australia’s inflation report will be released at 11.30am AEST.
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